The New Comparative Economics

Shleifer, Andrei, NBER Reporter

The traditional field of "Comparative Economics," which deals with comparisons of socialism and capitalism, died with the collapse of socialism in Eastern Europe and the Soviet Union a decade ago. But from its ashes, and from the challenging experiences of transition and the Asian financial crisis, emerged a new field. This field, the "New Comparative Economics," shares with its predecessor the notion that by comparing alternative economic systems, we can better understand what makes each of them work. But this new field sees the key comparisons as being of alternative capitalist models prevailing in different countries.

Every capitalist economy has many public and private institutions. These institutions' function is to choose political leaders, to maintain law and order, to secure property rights, to redistribute wealth, to resolve disputes, to govern firms, to allocate credit, and so on. Political economy over the last two centuries, as well as recent empirical research, demonstrate that these institutions differ tremendously and systematically among countries, and that these differences have significant consequences for economic and political performance. The comparison of these institutions and of their effectiveness, with a focus on understanding which ones are appropriate in what circumstances, is the subject of the New Comparative Economics.

The New Comparative Economics shares with institutional economics the recognition that the pure competitive model is not a useful way to think about capitalist economies, and that political and economic institutions crucially shape performance. Unlike institutional economics, however, which stresses the common achievements of capitalist economies, such as protection of private property, the New Comparative Economics focuses on institutional diversity. The New Comparative Economics also shares with the field of public choice its emphasis on politics. Most crucial institutional differences among countries - whether regulating markets or regulating politics -- are governmental. It is impossible to understand the formation of institutions, their consequences for performance, or their appropriateness for the circumstances without understanding the political forces that drive institutional evolution.

In thinking about institutional diversity and its consequences, it is best to start from first principles. Since the days of the Enlightenment, economists agreed that good economic institutions must secure property rights, enabling people to keep the returns on their investment, enter into contracts, and resolve disputes. Such security encourages people to invest in themselves and in physical capital, and thus fosters economic growth. But there are two sides to the security of property rights. On the one hand, investment must be secured from expropriation by one's neighbors, be they thieves, competitors, or other violators. For this, effective public enforcement of property rights is required, sometimes termed law and order. On the other hand, a strong government--one capable of protecting property against private infringement--can itself become the thief. To contain such a government, institutions restricting its power are necessary, sometimes referred to as the rule of law.

Accordingly, it is useful to distinguish two aspects of institutional design. The first concerns restrictions on private expropriation: law and order. The second concerns restrictions of public expropriation: the rule of law. in both of these areas, recent research has greatly expanded our understanding. I cannot survey this research, but can illustrate some of the recent findings largely using the papers I wrote with several colleagues, including Simeon Djankov Edward L. Glaeser, Simon Johnson, Rafael La Porta, Christian Pop-Eleches, and Robert W Vishny.

Law and Order

The tremendous diversity of the security of property rights among capitalist economies, with its profound consequences for economic growth, raises two related questions. …

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